Gold & Silver Trading Alert: Is the Decline in Mining Stocks Over?

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Briefly: In our opinion, full (150% of the regular full position) speculative short positions in gold, silver and mining stocks are justified from the risk/reward perspective.

Mining stocks moved higher once again yesterday and GDX managed to close above $20. The question is if this strength heralds a bigger rally, similar to what we saw at the beginning of 2016? Probably not – in fact, it seems that the rally is either already over or close to being over. Let’s take a look at the charts for details (charts courtesy of http://stockcharts.com).

GDX - Market Vectors Gold Miners - Gold mining stocks

In yesterday’s alert, we wrote the following:

Mining stocks have indeed moved higher and the volume was not low, so it looks quite encouraging at the first sight. However, when one compares it to the previous corrective upswings that we’ve seen since the middle of the year, it becomes clear that it is yet another move that’s in tune with the previous pattern.

What pattern? Once mining stocks broke below the previous low, they didn’t move much lower until they moved back to the previous low and verified the breakdown. In September and October miners moved a bit above the previous high before starting the bigger plunge, and in November miners moved almost to the previous low. Where are miners now? Slightly below $20 and also below the November lows (in terms of both closing prices and intra-day lows). Consequently, nothing changed – the trend remains down and miners can even move a bit higher without changing the outlook.

Mining stocks moved less than 2% higher yesterday and they didn’t touch, let alone break, the horizontal resistance created by the November low (in terms of daily closing prices). This means that we are probably still close to another local top, but we don’t have to be right at it. Today’s pre-market upswing in gold and silver seems to confirm it. Please note that in the two previous cases this year, miners moved a bit above the previous lows and that was the final top for the short-term upswing and we could see something similar also this time.

Still, isn’t mining stocks performance relative to gold a bullish sign? Let’s take a closer look at the GDX to GLD ratio which illustrates this relationship.

GDX:GLD - gold stocks to gold ratio

The upswings in the ratio were seen in the past several months just as corrective upswings in miners were. During the upswings, the ratio corrected between 50% and 61.8% of the preceding downswing and that’s exactly what we are seeing right now.

The implications is that nothing particularly odd or out-of-trend is happening.

Short-term Silver price chart - Silver spot price

Silver moved a bit higher and the question is if the breakdown below the May / June low was invalidated. In our opinion, it wasn’t. The breakdown was confirmed, while the move higher in silver was very small and took place on relatively low volume.

Long-term Silver price chart - Silver spot price

Besides, it’s barely visible from the long-term point of view. The weekly low (weekly closing price) was $16.25 and that’s above the current price even taking into account today’s small pre-market move higher.

Short-term Gold price chart - Gold spot price

Gold also seems to show that there’s nothing special about this upswing – in early December, the quick very short-term move was over $30 – gold didn’t move as much this week. Besides, please note that the volume that accompanied this week’s upswing is relatively low, which is a bearish sign.

Summing up, the short-term outlook remains bearish as the current small move higher is in tune with the previous small upswings during the bigger decline. Consequently, it doesn’t seem that anything changed and it seems that we will see another big move lower before a bigger corrective upswing is seen (after which, we expect precious metals to move to new – and final – lows) and that we will see this decline shortly. In other words, we expect the profits on this short position (opened on Dec. 14 with silver above $17) to increase further before it is over.

Depending on the bullish confirmations that we may (!) see at that time, we may decide to temporarily open a long position once gold moves very close to its 2015 low, but it’s too early to say if this will really be the case at that time. Either way, it seems that the final bottom in the precious metals market will form below the 2015 low and we strongly suggest preparing for it.

As always, we will keep you – our subscribers – updated.

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Short positions (150% of the full position) in gold, silver and mining stocks are justified from the risk/reward perspective with the following stop-loss orders and initial target price levels / profit-take orders:

Gold: exit-profit-take level: $1,063; stop-loss: $1,183; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $58.77
Silver: initial target price: $13.12; stop-loss: $17.53; initial target price for the DSLV ETN: $46.18; stop-loss for the DSLV ETN $24.86
Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $22.62; initial target price for the DUST ETF: $143.56; stop-loss for the DUST ETF $41.88

In case one wants to bet on junior mining stocks' prices (we do not suggest doing so – we think senior mining stocks are more predictable in the case of short-term trades – if one wants to do it anyway, we provide the details), here are the stop-loss details and initial target prices:

GDXJ ETF: initial target price: $14.13; stop-loss: $38.12
JDST ETF: initial target price: $104.26; stop-loss: $28.88

Long-term capital (core part of the portfolio; our opinion): No positions (in other words: cash)

Insurance capital (core part of the portfolio; our opinion): Full position

Please note that the in the trading section we describe the situation for the day that the alert is posted. In other words, it we are writing about a speculative position, it means that it is up-to-date on the day it was posted. We are also featuring the initial target prices, so that you can decide whether keeping a position on a given day is something that is in tune with your approach (some moves are too small for medium-term traders and some might appear too big for day-traders).

Plus, you might want to read why our stop-loss orders are usually relatively far from the current price.

Please note that a full position doesn’t mean using all of the capital for a given trade. You will find details on our thoughts on gold portfolio structuring in the Key Insights section on our website.

As a reminder – “initial target price” means exactly that – an “initial” one, it’s not a price level at which we suggest closing positions. If this becomes the case (like it did in the previous trade) we will refer to these levels as levels of exit orders (exactly as we’ve done previously). Stop-loss levels, however, are naturally not “initial”, but something that, in our opinion, might be entered as an order.

Since it is impossible to synchronize target prices and stop-loss levels for all the ETFs and ETNs with the main markets that we provide these levels for (gold, silver and mining stocks – the GDX ETF), the stop-loss levels and target prices for other ETNs and ETF (among other: UGLD, DGLD, USLV, DSLV, NUGT, DUST, JNUG, JDST) are provided as supplementary, and not as “final”. This means that if a stop-loss or a target level is reached for any of the “additional instruments” (DGLD for instance), but not for the “main instrument” (gold in this case), we will view positions in both gold and DGLD as still open and the stop-loss for DGLD would have to be moved lower. On the other hand, if gold moves to a stop-loss level but DGLD doesn’t, then we will view both positions (in gold and DGLD) as closed. In other words, since it’s not possible to be 100% certain that each related instrument moves to a given level when the underlying instrument does, we can’t provide levels that would be binding. The levels that we do provide are our best estimate of the levels that will correspond to the levels in the underlying assets, but it will be the underlying assets that one will need to focus on regarding the signs pointing to closing a given position or keeping it open. We might adjust the levels in the “additional instruments” without adjusting the levels in the “main instruments”, which will simply mean that we have improved our estimation of these levels, not that we changed our outlook on the markets. We are already working on a tool that would update these levels on a daily basis for the most popular ETFs, ETNs and individual mining stocks.

Our preferred ways to invest in and to trade gold along with the reasoning can be found in the how to buy gold section. Additionally, our preferred ETFs and ETNs can be found in our Gold & Silver ETF Ranking.

As always, we'll keep you - our subscribers - updated should our views on the market change. We will continue to send out Gold & Silver Trading Alerts on each trading day and we will send additional Alerts whenever appropriate.

The trading position presented above is the netted version of positions based on subjective signals (opinion) from your Editor, and the Tools and Indicators.

As a reminder, Gold & Silver Trading Alerts are posted before or on each trading day (we usually post them before the opening bell, but we don't promise doing that each day). If there's anything urgent, we will send you an additional small alert before posting the main one.

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